What Is Financial Performance?
Financial performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. The term is also used as a general measure of a firm's overall financial health over a given period.
Analysts and investors use financial performance to compare similar firms across the same industry or to compare industries or sectors in aggregate.
Understanding Financial Performance
There are many ways to measure financial performance, but all measures should be taken in aggregate. Line items, such as revenue from operations, operating income, or cash flow from operations can be used, as well as total unit sales. Furthermore, the analyst or investor may wish to look deeper into financial statements and seek out margin growth rates or any declining debt.
There are many stakeholders in a company, including trade creditors, bondholders, investors, employees, and management. Each group has its own interest in tracking the financial performance of a company. Analysts learn about financial performance from data published by the company in Form 10K, also known as the annual report. Public companies must publish the SEC required 10K form. The purpose of the report is to provide stakeholders with accurate and reliable financial statements that provide an overview of the company's financial performance.
In addition, company leaders audit and sign these statements and other disclosure documents. In this way, the 10K represents the most comprehensive source of information on financial performance made available to investors annually. Included in the 10K are three financial statements: the balance sheet, the income statement, and the cash flow statement.
The financial performance identifies how well a company generates revenues and manages its assets, liabilities, and the financial interests of its stakeholders.
The balance sheet is a snapshot of the financial balances of an organization. It provides an overview of how well the company manages its assets and liabilities. Analysts can find information about long-term vs. short-term debt on the balance sheet. They can also find information about what kind of assets the company owns and what percentage of assets are financed with liabilities vs. stockholders' equity.
The income statement provides a summary of operations for the entire year. The income statement starts with sales or revenues and ends with net income. Also referred to as the profit and loss statement, the income statement provides the gross profit margin, the cost of goods sold, operating profit margin, and net profit margin. It also provides an overview of the number of shares outstanding, as well as a comparison against performance the prior year.
- Often, the financial statements (e.g., balance sheet, income statement, and statement of cash flows) of a company are used to measure the financial performance of a firm.
- No single measure should be used to define the financial performance of a firm.
Cash Flow Statement
The cash flow statement is a combination of both the income statement and the balance sheet. For some analysts, the cash flow statement is the most important financial statement because it provides a reconciliation between net income and cash flow. This is where analysts see how much the company spent on stock repurchases, dividends, and capital expenditures. It also provides the source and uses of cash flow from operations, investing, and financing.